Discussion of "MONK: Mortgages in a New Keynesian Model", by Garriga, Kydland & Sustek 1 Carlos Thomas Banco de España Konstanz Seminar on Monetary Theory and Policy, 17 May 2018 1 These slides represent the author’s views and not necessarily those of Banco de España or the Eurosystem. Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Introduction Standard NK model abstracts from long-term interest rates... ... despite their importance for economic decisions (e.g. through HH mortgages) and MP deliberations Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Introduction Standard NK model abstracts from long-term interest rates... ... despite their importance for economic decisions (e.g. through HH mortgages) and MP deliberations Garriga, Kydland & Sustek (GKS) propose a two-agent (lender-borrower) NK model with long-term nominal mortgages to study aggregate & redistributive impact of 1 different MP shocks: "standard" (transitory) MP shock vs (very 2 persistent) "inflation-targeting" shock through two channels/rigidities: price stickiness vs LT nominal 3 mortgages under different mortgage contracts: FRM vs ARM 4 Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Introduction Standard NK model abstracts from long-term interest rates... ... despite their importance for economic decisions (e.g. through HH mortgages) and MP deliberations Garriga, Kydland & Sustek (GKS) propose a two-agent (lender-borrower) NK model with long-term nominal mortgages to study aggregate & redistributive impact of 1 different MP shocks: "standard" (transitory) MP shock vs (very 2 persistent) "inflation-targeting" shock through two channels/rigidities: price stickiness vs LT nominal 3 mortgages under different mortgage contracts: FRM vs ARM 4 (2) motivated by empirical importance of " Level-factor shock " for yield curve fluctuations Interpreted in macro-fin literature as π -targeting shocks model’s π -targeting shock has similar empirical properties as L-factor shock Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Results "Standard" shock (transitory ↑ in short-term rate) have mostly aggregate effects ( ↓ y , ↓ π ) mostly through price stickiness channel Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Results "Standard" shock (transitory ↑ in short-term rate) have mostly aggregate effects ( ↓ y , ↓ π ) mostly through price stickiness channel "Inflation-targeting" shock (very persistent ↑ in short-term rate) has mostly redistributive effects mostly through mortgage payments benefitting borrowers under FRM, and lenders under ARM Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
The mortgage (income) channel: ARM vs FRM Real mortgage payments, R t + γ t ˜ d t 1 + π t Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
The mortgage (income) channel: ARM vs FRM Real mortgage payments, R t + γ t ˜ d t 1 + π t Persistent increase in i t and π t . After impact period, � R t + 1 + γ t + 1 � ∆ R t + 1 R + γ ≈ 1 + π − ∆ ( 1 + π ) 2 ∆ π t + 1 1 + π t + 1 ≈ ∆ R t + 1 − ( R + γ ) ∆ π t + 1 � �� � � �� � Int. rate effect Fisherian effect Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
The mortgage (income) channel: ARM vs FRM Real mortgage payments, R t + γ t ˜ d t 1 + π t Persistent increase in i t and π t . After impact period, � R t + 1 + γ t + 1 � ∆ R t + 1 R + γ ≈ 1 + π − ∆ ( 1 + π ) 2 ∆ π t + 1 1 + π t + 1 ≈ ∆ R t + 1 − ( R + γ ) ∆ π t + 1 � �� � � �� � Int. rate effect Fisherian effect R + γ small, therefore under ARM, ∆ R t + 1 = ∆ i t + 1 dominates under FRM, ∆ R t + 1 = 0 for pre-existing loans, ∆ π t + 1 dominates Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Praise Authors take seriously the importance of long-term nominal debt for HH decisions and propose a tractable NK framework to assess its relevance for MP transmission Transparent analysis of transmission channels, insightful results on relevant MP issues Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Praise Authors take seriously the importance of long-term nominal debt for HH decisions and propose a tractable NK framework to assess its relevance for MP transmission Transparent analysis of transmission channels, insightful results on relevant MP issues Contributes to literature on redistributive effect of MP in HA environments... Gornemann Kuester Nakajima 2016, Auclert 2016, McKay Nakamura Steinsson 2017, Kaplan Moll Violante 2017, Challe 2017... Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Praise Authors take seriously the importance of long-term nominal debt for HH decisions and propose a tractable NK framework to assess its relevance for MP transmission Transparent analysis of transmission channels, insightful results on relevant MP issues Contributes to literature on redistributive effect of MP in HA environments... Gornemann Kuester Nakajima 2016, Auclert 2016, McKay Nakamura Steinsson 2017, Kaplan Moll Violante 2017, Challe 2017... LT debt: effect of current inflation (Fisherian effect) vs anticipated inflation; Nuño & Thomas 2018 ("OMP with HA") Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Main comment Paper gives (too) much prominence to "inflation target shocks" Interpretation of level factor as inflation-target shocks Economic significance Policy implications Relevance for current environment Suggest slight change of focus Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Inflation-target shock as model counterpart of level factor Level factor of yield curve interpreted as persistent shocks to inflation target on the basis of statistical properties: (1) highly persistent, (2) moves both ST and LT rate, (3) high correlation with inflation Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Inflation-target shock as model counterpart of level factor Level factor of yield curve interpreted as persistent shocks to inflation target on the basis of statistical properties: (1) highly persistent, (2) moves both ST and LT rate, (3) high correlation with inflation Alternative interpretation: endogenous MP response to persistent (non-MP) shocks Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Inflation-target shock as model counterpart of level factor Level factor of yield curve interpreted as persistent shocks to inflation target on the basis of statistical properties: (1) highly persistent, (2) moves both ST and LT rate, (3) high correlation with inflation Alternative interpretation: endogenous MP response to persistent (non-MP) shocks Standard Taylor rule, i t = r ∗ + ¯ π ) + ν y ( y t − y ∗ π + ν π ( π t − ¯ t ) Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Inflation-target shock as model counterpart of level factor Level factor of yield curve interpreted as persistent shocks to inflation target on the basis of statistical properties: (1) highly persistent, (2) moves both ST and LT rate, (3) high correlation with inflation Alternative interpretation: endogenous MP response to persistent (non-MP) shocks Standard Taylor rule, i t = r ∗ + ¯ π ) + ν y ( y t − y ∗ π + ν π ( π t − ¯ t ) Any shock that persistently moves inflation and output gap in same direction persistently moves short term rate in same direction yields (1), (2) and (3) Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Economic significance of inflation target shocks Even if interpretation is correct, in the model there is nothing intrinsically different between " π -target" shock and "standard" MP shock Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
Economic significance of inflation target shocks Even if interpretation is correct, in the model there is nothing intrinsically different between " π -target" shock and "standard" MP shock Taylor rule in GKS can be written as i t = r ∗ + ν π π t + η t − ( ν π − 1 ) µ t "Standard" shock η t and "inflation-target" shock µ t are observationally equivalent Konstanz Seminar on Monetary Theory and P Carlos Thomas (BdE) Discussion of Garriga, Kydland & Sustek / 11
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